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What Will Define Yellen's Fed Term?

Federal Reserve Chairs, as closely watched as they are, tend to gain a reputation during their tenures. Arthur Burns (1970-1978) was known for a lack of independence, keeping interest rates low under political pressure by his own admission, even as inflation soared. Paul Volcker (1979-1987) famously broke the back of runaway inflation, sparking two recessions in the process. The cryptic and autocratic Alan Greenspan (1987-2006) presided over the Great Moderation and advocated for deregulation, but perhaps should have been more aggressive in raising interest rates ahead of the housing bust. Ben Bernanke (2006-2014), an erstwhile student of the Great Depression, validated his nickname, “Helicopter Ben” (as in, throwing wads of cash out of a helicopter), by wielding massive quantitative easing programs to prevent the 2008-2009 Financial Crisis from becoming a depression. What will Janet Yellen, the newest Fed Chair, be known for?

Yellen is a dove1 with an academic specialization in labor markets. Given the ongoing weakness in employment, this is an apt specialty, indeed. Temperamentally, she is probably more like her immediate predecessor than like Greenspan. “The Maestro” famously always spoke first at Federal Open Market Committee (FOMC) meetings, making it understood that his was the Greenspan Fed; others on the committee knew to fall into line. Bernanke, in contrast, took a more inclusive, transparent approach to leadership, letting the more hawkish members of the committee have their say and cast opposing votes on policy decisions, if they so desired.

Yellen has a reputation for showing up to meetings extremely well prepared, and for tenaciously trying to persuade opponents. She once convinced Alan Greenspan to change his mind and not pursue a goal of zero percent inflation, for example. I would expect her to follow Bernanke’s example, and allow the FOMC’s two new hawkish voting members, Philadelphia Fed President Charles Plosser and Dallas Fed President Richard Fisher, to have their voices heard, regardless of their staunchly anti-inflation views.

A dove with talons?

I’d also remind readers that while Yellen in recent years has clearly indicated that she views the weak labor market as being of greater immediate concern than inflation, she hasn’t hesitated to take the opposite view in the past. In 1996, for example, she sounded the alarm on wage-price inflation, calling it a “major risk” in the context of the times. In other words, Yellen may be a dove, but she’s not an ideologue. She’s focused on job growth right now, but she certainly hasn’t forgotten the other half of the Fed’s dual mandate, price stability.

It’s too early to say for sure what Janet Yellen will ultimately become known for. She faces important challenges in trying to help boost employment and will surely have her chops tested as the Fed unwinds its quantitative easing programs. Someday, of course, she’ll likely have to begin tightening monetary policy, though futures markets are anticipating no rate hikes until 2015 at the earliest. There’s ample reason to believe that she and her Fed colleagues are up to these tasks. But, as has been the case with her predecessors, Yellen is likely to face some unforeseen challenges, too. Will she avoid financial market bubbles? What else could go wrong, and how effectively will she respond? It will likely be many years before we know what her legacy as Fed Chair will be. One thing is clear, however: Making tough but necessary decisions is easier for a Fed Chair who has at least the implicit support of the sitting president, as Paul Volcker had from both Carter and Reagan.

For now, with the books closed on Ben Bernanke’s tenure at the Fed, we should expect continuity. Short-term rates should remain low for a long time, and the Fed is likely to continue to taper its asset purchases at a steady monthly rate, unless incoming U.S. economic data deteriorate quite dramatically.

1 A “dove” is an economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that inflation and its negative effects will have a minimal impact on society.

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These views represent the opinions of OppenheimerFunds and are not intended as investment advice or to predict or depict performance of any investment. These views are as of the open of business on February 14, 2014 and are subject to change based on subsequent developments.

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